Solid Foundation

RGL Forensics had a catastrophe response team on the ground immediately following last year's Chilean earthquake. Jenny Larner (Hodgson), a Director in the London office, recounts her experiences.

Twelve months ago, on 27 February 2010, an earthquake struck Chile at 3.34am. It registered 8.8 on the Richter scale and was one of the largest earthquakes ever recorded. In the first few weeks after the earthquake, insurers built a picture of the scope of losses and the potential business interruption impact. It soon became apparent that the insured damage was extensive. Initial reports estimated insured losses between $2bn (S1.2bn) and $8bn, while the latest reports show losses now estimated at $8.8bn. This was the mostly costly catastrophic event of 2010 for insurers and the most significant insured event to ever affect South America. Losses spanned a broad range of industries including agricultural businesses, fisheries, ports, wineries, steel manufacturers, retailers, pharmacies and professional services. They resulted from earthquake and tsunami damage, looting and contingent losses — for example, supplier extension.

Language barrier

This earthquake brought new challenges to the insurance market. It has been unlike other recent catastrophic events in Australia, New Zealand and North America, where the predominant language is English. Language skills in South America are crucial. In general there is a greater acceptance of help from international professionals who can converse in the local language, because meetings are more productive and discussions tend to be more open. Loss adjusters and service providers, including experts such as forensic accountants, also had to draw on international support to manage the workload, with many insurance professionals from overseas spending a significant part of last year in Chile. Appreciation of cultural differences and local business practice was also essential. The claims process in Chile is heavily regulated by the Superintendencia de Valores y Seguros de Chile. Loss adjusters' reports are released simultaneously to the insurance company and the insured party, and the final report is binding unless it is contested within 10 working days by either party. Insurance policies are, in general, written in Spanish and wordings differ to international policies. Consequently, it has been crucial to have a good grasp of the intricacies of the local market and differences in policy wordings. Many companies had not previously claimed under the BI section of their policy. In several of the initial meetings forensic accountants were tasked with explaining the fundamentals of BI calculations to the insured — including loss of profits, economics of increased costs of working and complex issues such as underinsurance. But catastrophic events like earthquakes raise interesting BI issues. An earthquake can affect multiple businesses operating in the same industry and across supply chains. In this instance demand for the manufacturer's product may decrease initially while retailers are also shutdown, but demand may then increase when retailers are replenishing damaged stock.

Supply and demand

Consumer behaviour also needs to be taken into consideration. These issues require macro-economic review of countrywide data sources and careful consideration of the wide area impact of the incident and how this should be treated within the cover of the policy. The impact of wide area damage varies and each case needs to be considered on its own merits. For example, some businesses may gain from damage to surrounding areas by reaping the rewards of competitors that remain out of operation. However, other businesses will suffer from the wider area impact. This is, of course, a controversial issue given recent developments following Hurricane Katrina and in particular the Orient Express Hotel case. Prices of commodities have been closely monitored by forensic accountants and loss adjusters following the event. Large scale damage can cause fears of scarce supply of commodities, such as fishmeal, and high demand for construction materials. A catastrophe has the added challenge that there may be more than one major supplier with damage. In this instance, tracing the increase in price back to each individual business is a complex task. It is complicated even further by other global supply and demand factors that influence prices simultaneously. In general maximum indemnity periods in UK and European policies tend to be 12, 18 or 24 months depending on the business. However, in Chile a large proportion of policies are limited to much shorter periods. Due to the extent of the damage, many businesses have suffered losses for the maximum indemnity period and beyond. In these cases increased costs of working have been incurred to protect revenue potentially beyond the maximum indemnity period and, therefore, consideration of the benefit to insurers in paying these costs is necessary. The majority of businesses have chosen to reinstate, but in cases where the plant is totally devastated an insured may opt to cease operations. Timing of this decision will impact the level of ongoing fixed costs that are incurred throughout the indemnity period. In such scenarios insurance professionals have had to work together with the insured to find the best solution for all parties and avoid ongoing unnecessary expenses.

Diplomacy demanded

Underinsurance has also been a significant issue. This has lessened the affect of BI measurement issues, such as the level of expected sales or gross profit rate However, the fact that only a proportion of the loss sustained by the insured will be coverable under the policy is never an easy issue to convey. In one day the Chilean insurance market received more than 100 months' worth of claims, creating an immense workload. The vast majority of claims have been settled within a year of the event, but the aftershocks are still continuing, with some tremors considered as new seismic activity. On 11 February this year, an earthquake registering 6.8 on the Richter scale struck in the same region near Concepcion in Chile causing panic in the local area, Fortunately this resulted in few insurance claims — but it does raise concerns that there may be further catastrophic events in Chile, just as has been so tragically seen in Christ church, New Zealand. Hopefully insurers can learn from the experience over the past year and be better prepared for future events.